Pakistan-China Economic Corridor: a cost-benefit analysis

Published: May 3, 2015
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ISLAMABAD: The Pakistan-China Economic Corridor (PCEC) has been rightly termed a game changer. A careful cost-benefit analysis is required to assess for whom it will be the game changer. The key parameters should be additional business and additional savings.

Every day, China spends around $18 million on import of 6.3 million barrels of oil as shipment costs from the Middle East, accounting for 80% of its all oil needs, routing through the Strait of Malacca covering a distance of 9,912 miles. By cutting a corridor directly from Kashgar to Gwadar, it will bring these costs significantly down to one-third of the current levels as new distance will be 3,626 miles to Central China, whereas only 2,295 miles till West China.

Even if China were to use PCEC only for 50% of its current level of oil supplies, it will save around $6 million every day, almost $2 billion every year.

It is true that these savings are peanuts to the Chinese economy, however, the greater gain may lie in the strategic outreach via Gwadar as its Maritime Silk Route.

There is another benefit that will accrue to China. As half of Chinese exports are destined on its Western side, it will also gain tremendously by saving on its containerised traffic costs.

China is one of Pakistan’s largest trading partners; the two-way trade exceeded $16 billion last year, marking an annual growth of 12.57%. While our exports to the United States and European Union earn us trade surplus, our imports from Chinese contribute to enlarging the trade deficit.

The Chinese president has promised $46 billion investment to Pakistan and the planning minister has stated that out of that amount, $11 billion has been set aside for infrastructure work on the corridor, while the remaining $35 billion will be directed towards energy projects.

In all likelihood, the $11-billion amount for infrastructure purposes is a Chinese loan whereas the $35-billion investment for the power sector is yet to be converted into a concrete term sheet.

Consider this example. According to the Ministry of Finance, the Executive Committee of National Economic Council, in 2014, approved Karachi-Multan-Lahore Motorway Project – construction of Sukkur-Multan section (387 kilometres) – with a rationalised cost of Rs259.353 billion or $2.59 billion.

Ten per cent cost of the project will come from the Public Sector Development Programme and 90% of the cost as credit financing through the government of China. This will be part of PCEC.

In the form of PCEC, Pakistan will acquire a new asset in terms of infrastructure. However, it has to first mobilise its own industry and trade sectors to make the best use of the corridor. Else, it will be a road and pipeline largely meant for Chinese business – on Pakistan’s taxpayers’ cost – and now protected by the Pakistan Army on our cost.

The term-sheet for Chinese investment in the power sector does not seem very promising at the moment. The federal government’s sovereign guarantee has been called in several times by IPPs over the last few years. The Chinese may not give it its due value.

The next alternative for them as a guarantee is a revolving letter of credit backed by the government. That is almost a non-starter for the government as it will imply special privileges to Chinese investors and no bank can offer revolving letter of credit for the life cycle of a power project, running over decades. The government should refuse such requests.

What Pakistan needs to do?

If Pakistan cannot overcome its power crisis, and prepare a trade-centric economic vision, we stand to benefit little from PCEC in terms of additional business opportunities apart from temporary jobs. One scenario for our planning and finance ministers is to consider imposing a toll tax on Chinese oil shipment and trade traffic. Another possibility is to negotiate infrastructure projects on the basis of build-own-operate-transfer instead of an outright loan.

China needs us. Pakistan should embrace this huge opportunity with a pragmatic, and business-like cost-benefit analysis instead of confounding this transaction with metaphors of oceans, mountains, honey and now iron. It’s about hard cash which the finance minister badly needs for the country. We should not leave too much cash on the Chinese Wall.

The author is the Executive Director of PRIME Institute, an independent think tank based in Islamabad

Published in The Express Tribune, May 4th,  2015.

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Reader Comments (11)

  • Woz Ahmed
    May 4, 2015 - 5:37AM

    Dear Sir,
    I appreciate your analysis, but it seems very short of intellectual rigour.

    Though its northern border, China already sends freight to Rusdia and Europe, how will a link to Gwader further facilitate this ?

    Oil and gas come from Russia and former soviet states via pipelines in the north of the country.

    Research has shown that oil to Shanghai from Gwader will cost $10 a barrel via a pipeline, whilst by tanker it will be $2. Yes avoiding Mallacca straits is worth a premium, but 15-20% is rather high and it doesn’t avoid the straits of Hormuz, the other great choke point.

    PM Nawaz has stated for the last several months, no loan to the state is part of CPEC. If true, then the reported 17% Internal rate of return that has been reported , will require us to repatriate $ 8.5 billion a year back to China, also note unless Thar takes off, imported fuels will need to be paid for.

    As part of CPEC, the south Punjab solar project will sell fuel for 19cents a kW, yet in use and India , plants are now selling for 6 cents a kW , admittedly with state provided land.

    I am grateful for any investment, but loans , no doubt the state will ultimately have to underwrite, to Chinese companies, that have not had a competitive bidding process must raise more serious analysis.

    As a Pakistani think tank, I expected a more rigorous analysis from you.

    Please respond, if not publically 30hamilton at gmail.Recommend

  • ali salman
    May 4, 2015 - 6:57AM

    @ woz Ahmad. Thanks for your feedback. I agree this merits more debate. The point re IRR you mentioned only pertinent in case of power sector projects, which has not been finalized yet. I take same stance as you do in case of loans. And I guess other arguments you made add good value to this discussion. Recommend

  • Virkaul
    May 4, 2015 - 8:59AM

    I guess Woz Ahmed has very elaborately analysed the entire China Pakistan Economic Corridor Project. While trying to extract details, I was unable to find mention of oil pipeline for transportation of oil from Gwadar to Kashghar. If there is a provision for a pipeline, who owns it and who operates it is the key question. Bulk of Chinese oil consumption is in the East. It would be fair to compare transportation of oil to Shanghai not central China.

    As regards container traffic to Europe, plans to revive old silk route is already in advanced stage. This route is rom Shanghai – Xian-Urumqi – Almaty – and on to Istanbul. Bringing containers through Karakoram is much more risky due to hostile terrain.

    As regards financing, Pakistan government has not been transparent in explaining how much of the $46b is in loans and how much is in investments. I am sure no serious investments are made without financial analysis. Or else the entire project will end up like LNG import fiasco.Recommend

  • Raghav
    May 4, 2015 - 10:42AM

    While the PCEC has the potential to bring prosperity&peace to the entire region, not just Pakistan alone, if rightly used, which does not seem possible.

    China is primarily investing in this corridor from a future point of view, because the corridor will take 6-9 years to be fully functional. Besides the access to Arabian sea and oil imports, other strategic objectives of China are more clever;

    Unemployed, radicalised youth of Pakistan, especially of tribal areas, isn’t going to lay down their arms and get employment opportunities anytime soon. They have seen the power of the Gun, and quick economic gains of drug running, gun running, extortion, kidnapping, and looting of NATA containers & other traffic. When PCEC provides much more lucrative opportunities, all these groups will find it an attractive revenue model to attack the traffic on PCEC which Pak security forces will find hard to control. This will give China an opportunity to step in, initially to protect their cargo & investments, gradually it may lead to increased deployment.
    Secondly, Trade from China into Pakistan will grow tremendously, with Pk not being able to match with equal exports, will force Pk economy into trade deficit. This deficit will be exploited by China to procure , all kinds of mineral resources of Pak, which they will in due course strip bare. Corrupt Pak politicians will be too happy to collude.
    China will sooner than later establish a strong Naval Base at Gwadar which will lead to tensions in the region warranting responses from other forces including Iran,India,US etc.

    There are many dimensions to the PCEC which need be studied and Pak will be best advised to prepare for all kinds of scenarios that may emergeRecommend

  • Hammad Siddiqui (@hammads)
    May 4, 2015 - 12:50PM

    To me the key message is for the business community of Pakistan. Do they know (or have a slightest idea) of how they can get benefit out of it, particularly when they are excluded from the country to country negotiations! Recommend

  • Arshad
    May 4, 2015 - 12:54PM

    Interesting to see Indians forewarning Pakistan over (their perceived) perils of PCEC. Raghav’s opinion, in particular, is depiction of typical Indian mind set towards Pakistan.Recommend

  • Troubled
    May 4, 2015 - 1:18PM

    @Arshad:
    This was the most intellectually stimulating discussion I had ever seen on the tribune, until your comment. Had to break the trend and bring in the nonsense.Recommend

  • Archon
    May 4, 2015 - 2:08PM

    Hi all,

    I don’t believe the figure of $ 2 billion saving for china is verifiable. The reason why China has used the sea route all along is because its population and industry are concentrated in the Eastern seaboard and adjoining provinces. While it is true that China wants to move growth westwards, the proposed land route to eastern China is infeasible for another reason: internal Chinese transport network is still relatively weak and controlled by inefficient state firms (please check http://www.bcg.com/documents/file14891.pdf) for verification of this fact. So lets not all jump on the bandwagon and be realistic in our expectations.Recommend

  • Akbar Khan Mohamadzai
    May 4, 2015 - 7:28PM

    Good article, – the first one to quantify benefits to the Chinese and some of the pitfalls and requirements from Pakistan’s angle.

    The CPEC involves a subtle subjugation of Pakistan by overriding Chinese interests, — against which Pakistan will find itself less and less able to wriggle out of.

    Oh the best laid plans of mice and men…

    Poetic justice: being hoist by your own petard.Recommend

  • tanveer
    Jul 27, 2015 - 3:08AM

    well chinese government seems keenly interested to develop its western part that comprises of a dozen provinces and nearly 320 billion peoples who will be the key beneficiay of that project alongside with pakistanis. woz point is quite right it wont benefit china in terms of oil and gas imports as they have deeply invested in central asian oil and gas pipelines and fields. rather as cheap export route to arabs and dont forget to mention eastern africa seems the most lucrative ideas.Recommend

  • pamir khan barak
    Sep 14, 2015 - 8:39PM

    government should answer some question why pak-china corridor is devided into many roads….its should be just one rute from kasghar to gawadar through kpk & balochistan.Recommend

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